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New Report: Making Freemium Music Services Pay

Freemium-figure-2A new free report from MIDiA Consulting by Mark Mulligan takes a look at some of the challenges facing freemium web services including Pandora, Spotify and Deezer. From "free being too good" to customer churn, "Making Freemium Add Up" is well worth a read to see how freemium businesses are responding to the challenge of making free pay. The report itself is available for free to subscribers of Mark Mulligan's Music Industry Blog.

Mulligan announced the report on his blog explaining that it:

"analyse[d] an intentionally diverse selection of consumer web services, looking at the distribution and scale of their user bases and the relationship of these with their business models...It also includes long term data trend analysis of Spotify, Deezer and Pandora."

The report initially notes that inactive users are a problem for all freemium services because:

"Freemium businesses depend upon harvesting large swathes of users with free tiers and converting sizeable portions of those users to paid products." [p. 2]

In addition:

"Freemium services are below average [when comparing registered to active users]: all of the tracked freemium services have registered-to-active rates below the ‘industry’ average rate of 52%. All but two of the freemium services (Slacker and Deezer) have rates between 37% to 40%." [p. 3]

A primary concern with inactive users is customer churn, especially when they go away unimpressed. But "freemium inactive user bases are priceless qualified marketing lead databases" [p 4] and so a problem that represents an opportunity.

A different but related issue is that "free can be too good" and thus active users never move up to become paying customers.

In some cases, the freemium approach is supported with advertising which can offset the free being too good problem:

"The four freemium services with the lowest rates of active-to-paid user rates – Soundcloud, (0.1%), Pandora (2%), Skype (3%) and Hulu (8%) – have free tiers that are quite simply good enough for the majority of users, thus reducing the need for many to pay."

"This is a challenge YouTube will have to address as it introduces premium channels. In the case of Soundcloud the premium tiers are aimed mostly at content creators rather than the much larger base of consumers."

"For the other three though, it is simply that the free product is so good that the majority of users do not see a reason to upgrade and all three companies have robust business rationale for maintaining this status quo: Pandora and Hulu depend on advertising revenue, while achieving scale and platform reach is key for Skype owners Microsoft."

A key conclusion is that "social and communication services are well embedded" and have become a daily part of users' lives.

However content services, such as subscription music services, face numerous challenges in becoming a daily choice due to an array of free competing products and the tendency for music services to present a commoditized selection of music making differentiation difficult.

Another important conclusion is that:

"The free-to-paid divide needs narrowing: zero to $9.99 for streaming music on a phone is too great a leap. More needs to be done to bridge the divide."

Possibilities include third-party subsidies, e.g. bundling music with other services, and pricing and packaging experiments including shorter subscription periods.

While the report overall is in no way drawing a bleak picture, the closing line perhaps best sums up the situation facing subscription music services:

"Questions about the commercial sustainability of the freemium model remain but as long as the key players retain the cash commitment and strategic willingness to experiment with the model, the paid content sector will continue to edge further forwards to sustainability."

Lots to consider here as we "edge further forwards" to a deeper understanding!

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Hypebot Senior Contributor Clyde Smith (@fluxresearch/@crowdfundingm) also blogs at Flux Research and Crowdfunding For Musicians. To suggest topics for Hypebot, contact: clyde(at)fluxresearch(dot)com.

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